"What keeps me going are my clients. All my clients became my friends; and that's what makes me stronger." Lili Lim, an insurance agent in Jakarta, has been in the Indonesia insurance business for over 10 years, experiencing market-specific ups and downs such as the 1997 Asian financial crisis and the 1998 Indonesian government political crisis along the way.
The first couple of months of the financial crisis, Lili recalled, were indeed difficult, as many policyholders lapsed on their US dollar-pegged insurance contracts. However, some Indonesians also cashed in their US dollar accounts and signed new contracts. The economy, and the insurance business, eventually picked up and that incident is but a memory to Lili. Since the financial crisis, the Indonesian industry has moved away from US dollar contracts to local currency policies.
Similarly, Lili lightly dismissed the 1998 government political crisis. "Of course I was afraid then, but I realized that being in Indonesia, and doing my job, were really important to me." The insurance agent had temporarily moved to the United States for two months, but eventually returned to Indonesia and her profession.
To Lili, selling insurance is more than earning a commission; it also allows her to be her own boss and help others around her in financial matters. In this emerging market, most people are only starting to understand basic financial products. Among her friends, she is far better informed in finance. Reflecting on the opportunity, the Jakarta-based agent noted that "Most lndonesians don't know the benefits of insurance. Vietnam Insurance Association
People know it is good, but they don't know what about it is good. If I educate them on what these products do for them in the future, then at least the family's financials would be better." The agent recounted the story of a 29-year-old father, who suffered a sudden, acute sickness and was rushed to the hospital. That day, Lili accompanied the young wife to the hospital and submitted the claims for the operation. Today, 10 years later, the man is alive and healthy, and half of the sum assured from the policy Lili sold them still remains. The family maintains close contact with Lili. "It was the first time I felt that I could really help a family escape an otherwise terrible fate," noted the agent.
Lili's story is typical of those in Southeast Asia - Indonesia, Malaysia, the Philippines, Thailand, and Vietnam. These markets are known for their volatility but also their resilience. They are rapidly transforming markets where new developments in products and geographic expansion to the hinterlands are shifting the competitive landscape. Although foreign insurers dominate these markets, the domestic players have increased in strength over the last few years.
The combined markets of Indonesia, Malaysia, the Philippines, Thailand, and Vietnam have a population of some 486 million, which adds up to 43 percent of India or 37 percent of China; their estimated gross written premium (GWP) was slightly less than US$20 billion in 2007, compared to India's US$52 billion and China's US$68 billion. And Southeast Asia's markets are particularly open to foreign entrants - in fact multinational corporations (MNCs) are market leaders in many of them.
Growth rates are just as impressive as the rest of Asia. We expect the region to grow at around 15 percent, doubling its aggregate market premium to US$39 billion by 2012.
But Southeast Asia is hardly a homogeneous market. Instead, it is a region divided by language, culture and, of course, different levels of development. The markets in Thailand and Malaysia are more mature, with more developed channels and better educated consumers. The competitive landscape is relatively stable and rather difficult for new entrants. The Philippines is a relatively small market, with US$1.8 billion gross premium in 2007.
Prospects for growth in the next five years are bright at a projected growth rate of 15 percent per year, but the market is gradually becoming more difficult for the foreign players with tightening regulations. Vietnam and Indonesia rank high among Southeast Asian countries in terms of expansion prospects, with an expected growth rate of some 25 percent per year in the next five years. This could mean that Indonesia will become the biggest market within the region. Meanwhile, Vietnam is often referred to as "the next China," as its economy opened up roughly 10 years after China and has since followed its development footsteps - although it has been facing some economic disarray lately.
Vietnam
Of the five markets we have analyzed, Vietnam stands out as being in the start-up phase. Its rags-to-riches story also highlights the volatility that often accompanies developing economies. Vietnam Insurance Association
Vietnam's economic reform program (doi mo) only started in 1986, under a "market economy with socialist orientation" model that has similarities to China's model. In the 10 years between 1997 and 2007, Vietnam's nominal gross domestic product (GDP) grew at a 10 percent compounded annual rate. The government has set an aggressive target of doubling the size of the country's economy over the period 2000-10. A stable political environment and the government's willingness to integrate with ASEAN and the global economy have attracted lots of interest from foreign investors. Vietnam joined the World Trade Organization (WTO) in January 2007. Foreign direct investment inflows in 2006 reached US$12 billion, with a growth rate of 32 percent per annum for the period 2002-06. Foreign investments almost doubled to US$20.3 billion in 2007 (12 months after Vietnam joined the WTO).
Vietnam's life insurance market is still small in size in comparison to its Southeast Asian peers. However, many industry insiders consider the market a tremendous growth opportunity. This is supported by macroeconomic fundamentals. Life insurance penetration today is extremely low - it was just under 1 percent of GDP in 2007 and market development is at a very nascent stage with most players still selling simple endowment products. Today, five players in the market take up over 97 percent of market share.
The local incumbent, Bao Viet, had seen its share eroded while foreign entrants, Prudential (UK) and Manulife, have taken much of that business. But the competitive landscape has, by no means, settled down. For example, a newcomer, ACE, was able to establish around 2 percent market share within one year of entering the market, and we predict that a lot more MNCs, and some leading Asian life insurers (for example, the Taiwanese and Chinese insurers), will enter Vietnam over the next few years.
Some of the market dynamics are quite reminiscent of the development of many other Asian markets. In a high-interest-rate environment, Vietnamese insurers have been offering policies with high interest guarantees of 7-8 percent, which is similar to many Asian markets in the late 1990s. The booming stock market has often led to unrealistic return expectations from retail investors, and increased pressure on life insurers to offer products with competitive returns. In November 2007, the Ministry of Finance approved the sale of investment-linked products, after much lobbying from insurers.
Not everything is plain sailing for Vietnam, however. With continued high inflation and slowed economic growth, the economy started to run into troubled waters in early 2008. Vietnam's GDP slowed down to 6.5 percent growth in the first half of 2008. a much slower pace of growth than the 8.5 percent registered for 2007. In June 2008, inflation hit 26.8 percent as oil and food prices continued to skyrocket. Government initiatives to contain inflation further slowed down the economy. Consequendy, investor confidence dipped and the Ho Chi Minh stock exchange halved between March 2007 and March 2008.
Vietnam is entering a challenging period, and many investors have, since 2008, reconsidered their former enthusiasm for the country. Whether or not Vietnam can rebound on this setback will depend on the government's ability to keep its industry humming along at the current pace without further significant hiccups. Fortunately. the long-term fundamentals are sound in Vietnam: the country is not heavily indebted, and export growth is strong. The biggest constraint to growth is the state of its infrastructure.
Basic elements, such as roads and power, remain a concern, and despite efforts, Vietnam still remains among the 60 most difficult countries to do business in. Large investments and government initiatives are required to further develop its economy. Many steps have been initiated to improve the business infrastructure in Vietnam. but it is still not an easy place to do business. The gap between ideas and execution remains wide.
But despite the recent problems, Vietnam remains a "little China" in the eyes of many long-term investors - and the life insurance industry should be no exception here. The fundamentals are very strong and the long-term growth prospects for the insurance industry, plus the openness to foreign investors, make this country a highly attractive market for potential entrants. To find out more, you can check out Vietnam Insurance Association.
